Benchmark Maintains Bullish Outlook on Taboola's Shares

Benchmark Reiterates Buy Rating on Taboola Shares

In an encouraging move for investors, Benchmark recently reaffirmed its Buy rating on Taboola (NASDAQ:TBLA) shares, with a maintained price target of $5.00. This decision comes right before the company is set to announce its much-anticipated third-quarter earnings. This report is expected to be released in early November, kicking off discussions on Taboola’s recent performance in the marketplace.

Revenue Expectations and Margin Insights

Analysts at Benchmark are optimistic about the figures Taboola is likely to disclose, anticipating that net revenue and adjusted EBITDA will meet the projected third-quarter estimates. However, there is a cautious note on the expectations for the fourth quarter, with projections suggesting a substantial quarter-over-quarter increase in ex-TAC (traffic acquisition costs) gross margin which may not materialize.

Benchmark's estimates suggest a more tempered rise in ex-TAC gross margin, forecasting an increase of about 410 basis points compared to the consensus expectation of 670 basis points. This conservative outlook stems from the company's successful integration of Max Conversions, a strategy that reportedly now constitutes around 70% of Taboola's total revenue. While this integration is commendable, it appears to primarily enhance retained revenue rather than generating additional yield.

Management’s Optimistic Future Outlook

Despite current challenges, Management at Taboola remains optimistic about a potential return to yield growth in the latter half of 2024. Still, the unusual performance of ex-TAC margin in the third quarter, which was influenced by advertiser tests with Yahoo!, casts some uncertainty. These tests have produced net revenue without the associated TAC, creating temporary changes in margins that analysts are closely monitoring.

Current Valuation and Future Potential

Benchmark’s analysis suggests that the existing valuation of Taboola's shares is already taking into account the prevailing market apprehensions regarding second-half margins. Importantly, the research firm believes that the prospects for growth acceleration anticipated in 2025 are not yet reflected in the current stock price. This sentiment has reinforced Benchmark's decision to uphold a Buy rating with its DCF-based price target set at $5.00.

Highlighted Financial Performance

Despite recording a net loss of $4.3 million in the second quarter, Taboola showcased remarkable growth in key financial metrics. The company reported a 21% increase in ex-TAC gross profit, rising to an impressive $149.5 million. Additionally, adjusted EBITDA surged 138% to $37.2 million, while free cash flow doubled year-over-year to exceed $26 million. Furthermore, Q2 revenue exhibited a robust 29% year-over-year growth, reaching $428.2 million.

Technological Advancements and Strategic Growth

Taboola’s commitment to innovation is evident with its Maximize Conversions bidding technology, which has recently been opened to all advertisers. This AI-driven tool has dramatically enhanced campaign conversion rates, becoming an integral part of 70% of Taboola's advertising strategies. As this technology gains traction, it holds the promise of further elevating Taboola's performance in the advertising space.

Outlook for 2024 and Beyond

Benchmark’s revised projections include a downward adjustment of the price target from $6 to $5, but they maintain their Buy rating due to expected normalization in Taboola's core business growth. Analysts forecast a steady annual growth rate of 10-15%, driven by ramped up platform spending and improved margin structures. Taboola has confidently reiterated its 2024 guidance, predicting that ex-TAC will reach an impressive $667 million, with adjusted EBITDA and free cash flow projected to double from the figures reported in 2023.

Frequently Asked Questions

What is Benchmark's current rating for Taboola?

Benchmark retains a Buy rating on Taboola, maintaining a price target of $5.00 per share.

When is Taboola expected to report its third-quarter earnings?

Taboola is scheduled to announce its third-quarter earnings in the week of November 4, 2024.

What concerns did Benchmark express regarding Taboola's margins?

Benchmark noted potential concerns over expectations for a significant increase in ex-TAC gross margins for the fourth quarter, suggesting their estimates are more conservative.

How has Taboola's financial performance been recently?

Despite a net loss in the second quarter, Taboola reported significant growth in ex-TAC gross profit and adjusted EBITDA, indicating a positive trajectory.

What technological advancements is Taboola making?

Taboola has expanded its Maximize Conversions bidding technology, now accessible to all advertisers, which has enhanced campaign performance significantly.

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